Is écomiam (EPA:ALECO) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies écomiam SA (EPA:ALECO) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for écomiam

What Is écomiam's Debt?

The image below, which you can click on for greater detail, shows that écomiam had debt of €2.07m at the end of September 2024, a reduction from €3.09m over a year. However, it does have €3.95m in cash offsetting this, leading to net cash of €1.89m.

How Strong Is écomiam's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that écomiam had liabilities of €3.13m due within 12 months and liabilities of €2.85m due beyond that. Offsetting these obligations, it had cash of €3.95m as well as receivables valued at €2.57m due within 12 months. So it can boast €546.5k more liquid assets than total liabilities.

This surplus suggests that écomiam has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, écomiam boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if écomiam can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, écomiam saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is écomiam?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that écomiam had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €3.8m of cash and made a loss of €3.2m. But at least it has €1.89m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for écomiam (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.